Blog outlining massive fraud in the Australian listed investment company (LIC) and broader financial sector

Friday, 24 January 2014

Related party fraud continues to spread

Running a profitable company is hard. Running a succesful related party fraud and falsifying positive results is easy, which is why such cartels have proliferated in Australia. By using related party transactions cartels can manufacture profits and inflate their balance sheets, with the ultimate aim of using the falsified data to issue shares to the public at deliberately inflated prices. These cartels commonly feature a maze of crossholdings, sometimes partly disguised, "loans" and "write-offs" between related entities, sham transactions and bloated related party receivables. Cartel directors and their friends loot controlled companies with "consulting fees" and use inside information to frontrun the ramps.

Let's say related parties iScam and iFraud feel like adding $4m to their profit statements and balance sheets through a series of sham transactions. iScam sells something it paid next to nothing for, say a website domain name, to iFraud for $1m. This gives iScam a profit of $1m and iFraud a $1m asset. iFraud then sells it back to iScam for $2m, giving iFraud a $1m profit and iScam a $2m asset. After two more sham transactions iScam has the asset back on its books at $4m, with an aggregate "profit" of $2m created for each company.

Website domain names are popular vehicles for sham transaction fraud between related parties, as they can be bought cheaply and booked at high values. For example, iProperty (IPP.AX) used sham transactions involving a website domain to create "profits" and crossholdings with related party iCar (ICQ.AX) and associates, with IPP subsequently ramped 3X by a cartel including Australian Foundation Investment Company (AFI.AX). Freelancer (FLN.AX) used a website domain sale to provide a pay-off to an insider. Other newly launched revaluation frauds, such as My ATM Holdings (MYA.AX), DGI Holdings (DGI.AX), 99 Wuxian (NNW.AX) and Applabs Technologies (ALA.AX) involve the "purchase" of online businesses by related parties, followed by share price ramps.